Adventures in Banking - Complete Recovery in a Defunct Relationship

After completing my probationary period of 2 years, I was posted to the back of beyond of Bihar to do my rural and semi-urban assignments (3 years). On coming out from the cold, I got lucky and got an extremely plum posting at the Credit Appraisal Department at the bank’s Head Office. One of the corporate accounts which I was assigned was “B”, which was the first major credit relationship that I handled in my professional banking career and was a major learning experience.

At the time I was assigned this relationship (early 1990s), the banking system had an exposure of some Rs.60-70 crores to B through an informal consortium of 6-8 banks, with the bank I then worked for having the largest exposure. 

B happened to be the primary agency for distributing fertilisers to small and marginal farmers in the State but due to mismanagement, its management had been taken over by the State Government. Since they were bankrupt, a group of banks were coaxed (with RBI acting as midwife) to lend a sum of Rs.52 crores to purchase fertilisers for onwards sales to farmer, in the interest of these poor farmers. The money was borrowed, used to purchase fertilisers, and there the story took a completely different turn. Very little of the borrowed money in the form of sale proceeds came back to the lending banks and B's financial position was back to square one.

The same group of banks were again coaxed to lend another Rs.12-15 crores and the whole story was exactly repeated.

In classic credit terms it was an absolute Loss Asset. There was no collateral security of any kind, tangible or intangible, say as guarantees or even a fig leaf by way of letter of comfort. There were no financial statements to be analysed (historical or pro-rata future). As B’s books had neither been prepared or audited for over 10 years, there was no way to evaluate its financial condition or prospects and there were no stock statements or any other kind of data to support what happened to the primary security or the sale proceeds. In fact, there were virtually no officials / management personnel of the borrowing entity with whom we could have any kind of meaningful dialogue on this matter.

In this dilemma we started writing very polite letters to the State Govt at the highest levels (Chief Secretary, Finance Secretary etc) requesting for their very kind intervention for recovering our dues. Copies of all letters were marked to RBI. A minimum of one to two letters used to go every quarter with minor variations in language and emphasis. It was more of an exercise in creative writing in English for me, the lowest rung in the hierarchy. This was supported by way of meetings by the Bank’s top officials with top bureaucrats in the Government and RBI. For quite some time nothing happened, and the consensus was that this was an exercise in futility. But we kept persisting with the same strategy of supplicating the State Government and RBI in the absence of any other solution.  

Slowly wheels moved and after more than a year, the State Government agreed for RBI to directly debit their account (with RBI) in installments and repay the banks. In the process we got back our entire principal along with a fairly decent amount of interest. Though the entire process took another 2-3 years.  

Credit Lesson 102: There is life beyond obtaining and analyzing financial statements, depending on security, writing detailed appraisal memos, or seeking legal action in managing credit exposures! Sustained and regular follow-up also leads to progress – it may be slow and painful. But it is effective. Maybe we were plain lucky. But it has worked for me in many other sticky accounts too!

PS: Handling Government banking business in Indian banks used to be given very low priority. This is strange, considering the size and potentiality of this kind of business. Incidentally, one of the main functions of indigenous bankers in India was to collect land revenue and transfer it to the ruler for which they were entitled to a commission on quantum of revenue collected. That is very similar to present day government banking business. Because of which, these bankers had a very good estimate of the revenue yielding capacity of the areas for which they collected revenue and used this information for what was effectively corporate takeovers. From among the examples I am aware of, Gulab Singh borrowed Rs. 75 lakhs from Sheikh Saudagar to purchase Kashmir from the British, the Jagat Seth's of Murshidabad financed Robert Clive (reportedly 1 million pounds in gold) for overthrowing Siraj ud Doulah and taking over the rich province of Bengal, and a group of Banaras bankers financed a small time zamindar from Jaunpur to purchase the kingdom of Banaras again from the British.